State tax exemptions survived this session

Governor had pushed for several repeals to bring in $50 million

Published 10:00 pm, Sunday, May 15, 2005

The $26 billion operating budget Gov. Christine Gregoire will sign into law tomorrow includes nearly $400 million in new taxes -- primarily the revamped estate tax and cigarette and liquor taxes.

But the additional state revenue won't include new tax dollars from the source Gregoire promised to scour -- the state's 503 tax breaks, valued at more than $32 billion a year.

Shortly after taking office, Gregoire said she had identified exemptions that could be repealed to bring in more than $50 million. She proposed reducing the taxes on small businesses and closing other loopholes to compensate for the subsequent lost revenue.

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"That really didn't get much traction with the Legislature," said Victor Moore, Gregoire's lead budget writer. "It would have been tough to pass tax cuts during this session."

Gregoire and lawmakers faced a $1.8 billion budget shortfall when they began the legislative session.

"Eventually, when the governor decided to look for money for education, we looked at other tax sources -- that's when we looked at the estate and tobacco tax," Moore said. "Rather than go after a series of small tax sources, she wanted to look at larger ones."

But McIntire said even without the so-called performance audits of the exemptions, lawmakers scrutinize the loopholes anyway.

"It's not as though we are not continuously looking at these things," McIntire said. "In some respects we've made some progress this year."

But he said the incentives might be misguided.

"Rather than look at tax exemptions as a way to raise money, we need to ask: How can we better make the tax code serve the public purpose?" he said. "I think there is quite a bit of room to do some of that work, but what it takes is a little longer-term view of it, so we have the analysis."

Moore said the Office of Financial Management, which he directs, has already begun evaluating the performance of tax breaks similar to the way it looks at the public programs "to see if they are doing what they are supposed to be doing."

The state grants a variety of exemptions, some to advance public policies, others to stimulate the economy or attract job-generating businesses. Exemptions for manufacturing, which predominantly benefit The Boeing Co., are frequently used to illustrate how the state economy ultimately benefits from such incentives. But they are also cited as exhibit A in trying to make the case that the state should improve its business climate.

"From our perspective, you shouldn't have any tax exemptions at all. The state should have a uniformly low tax rate that allows businesses to prosper or fail based on the free-market system, and not corporate welfare," he said. "The answer is not to pick and choose the state's winners and losers based on the power of a firm's lobbyist, but to treat everybody equally with a uniformly low rate."

He said that addressing problems with the tax code by granting exemptions is a solution for one business, "but not for the rest of the employers and employees who are being harmed by that problem.

"That was the biggest frustration with the state's Boeing thing. Boeing wouldn't have needed this massive tax break if the state had been addressing the legitimate business climate problems over the last decade," he said.

"It's a vicious cycle now because you have a bidding war between the states, trying to out-subsidize each other instead of trying to make the best business climate."